Yet Another Value Podcast - Mario Cibelli from Marathon Partners on $UBER

Episode Date: August 19, 2020

Mario Cibelli, the founder of Marathon Partners and breakout star of the book Netflixed, talks about his background, how he invested in Netflix in the early 2000s, and his current investment in Uber.We also dive into two of his twitter threads: one on how interviewing the management at Expedia changed how he looked at companies, and one on how a due diligence trip to a Netflix Distribution Center opened his eyes to Netflix's moat.

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have the founder of Marathon Partners, Mario Chabelli. Mario, how are you doing? Pretty good. How are you doing? Doing great. So, Mario, let me just start this podcast the way I kind of do every podcast, and that's by plugging you. You know, our mutual friend modest proposal on Twitter, he kind of called you the breakout star of the book, Netflix, which is certainly true. But I think that might be underselling. you a little. You know, over the past 15 years, I think there's been a big shift where value investors have gone from, or the good value investors have gone from, I want to buy stocks at eight times price to earnings or something to, hey, look for something that's got platform value or where the historical financials kind of don't matter because two or three years from now, they've got a flywheel or a platform and the value is actually really in the future. And when I think about that, you know, your investment in Netflix, as detailed in the book, Netflix is kind of one of the first examples I can think of like a traditional value investor recognizing that.

And, you know, I just think it's great. So, I don't know, am I pitching you too hard or what do you think about that? No, that's, you know, it's been an evolution over time kind of investment style that I've developed. And I did work for a guy by the name of Amario Gabelli. We're not very similar names. When I told people I was having you on, they were like, Mario Gubeli or Chibeli? So, yeah, people get that confused all the time. I can vouch for that.

Yeah. So, you know, that was my very first job outside of college. I was in 1990. So I'm a little bit older than probably a lot of people floating around Finn Twit. I'm 52 now. I work there. And then I did two years stint at an investment bank. And then I went to another firm called Robodying Company, the Bob Roboibati, kind of a more

classic traditional value investor. You know, so Mario was pretty creative and open-minded. Bob was more kind of traditional. But so I did start off, you know, kind of trolling inefficient sectors and spinoffs and recaps and rights offerings and restructurings, low-float securities, all things like that, which is a good place to kind of get experience and learn how to invest. I did kind of tweet about it a couple weeks ago when I had. had a meeting in Seattle with the folks at Expedia that really kind of challenged me to kind

of view the world a little bit differently. So, you know, I guess it's not so, so important from my point of view to, you know, what a label is. We try to get, you know, high risk adjusted returns. You know, we have invested in companies that have been probably fall under the value category and others that have fallen into the growth category. But we've evolved over time and we're happy to invest where we think we can get to attractive rates return. Netflix was one, that we had two major periods in which we owned it probably spanned a total of seven or eight years between the two. And we were fortunate enough to get in there at a time where we had pretty nice access and um yeah i'll pause there for a second um that was great and i just kind of want to

dive into so so marathon uh you know like when did you found it and like obviously concentrated value invested like how concentrated are we talking here do you guys normally have kind of eight positions 20 what what are you talking about when you run a concentrated uh value investment portfolio you know the number of names could you know be as few as 10 you know maybe it's high as 15 or 16 at times. The concentration, you know, in the top 10 names could be as high as 80% of the portfolio, something like that. We've concentrated as much as in a single investment security, equity, security, you know,

over 20% of the portfolio, which, you know, you might imagine, you know, we're not throwing darts where, you know, you're sweating bullets with those kinds of positions. You know, you would think anyone that was willing to do that would know the company well and have done an extreme amount of research. Some of my stories that I've mentioned on Twitter and some others that I yet to discuss, you know, emanate from a position of, you know, very high concentration. And when you're that concentrated on in a particular name, you know, incremental bits of information. that might be worthless to many people in the investment community, let alone the world, you know, that could be very interesting to someone that makes their living by investing in, you know, equity, securities on a really concentrated basis. And also, I'd say, you know,

there's other folks that do that, you know, we're not the only one. You know, you tend not to optimize for cash. So it doesn't matter if you're, you know, 8% cash or 1% percent. cash or 11, if you have really big investment bets on, you know, those can really drive the performance both negatively and positively. So, you know, that creates volatility in the portfolio as well. So I started the fund on April 1st in 1997, so it's been quite some time. You know, I bootstrapped it. You know, I think my, I put a little bit of money in, which is all the money I had in the world at the time. My father gave me some money, which was just a little bit. little bit and my father-in-law and I kind of just worked it from there and you know grew over time

so we're not a massive fun but I've made a good honest living living over a long period of time and you know wildly competitive business super humbling business so you know I could say that I feel fortunate to have lasted this long yeah so that's 1997 continuously with our main fund you know through a variety of market conditions and here we are in 2020 and wild things are still happening. Would you... So you've been doing this a little longer than I have. If I told you that 2020,

would you say it's by far the craziest year you've kind of operated the fun through or is there anything else that kind of compares to it? You know, I thought 2008 was particularly brutal. I think sometimes your age and how many dependents you have and what's going on in your life. kind of figures into how you react to markets. You know, I will say, you know, I was probably more fearful

in 08 and 09 for sure than I was in the first court of 2020. You know, there was some lessons to be learned and, you know, going back to the great financial crisis that allowed me to better navigate this one. You know, I was also around when we launched the fund. There was a period of time where, you know, Small cat value stocks have been absolutely gutted and slaughtered and left for dead, and the values became so obscene, you know, that, you know, finding stocks that could double

was interesting, of course, over relatively short periods of time, but we started looking for triples and quadruples or extremely low risk rates of return on various investments. You know, and that kind of, that was a very painful market, too. That was 1998, but I had nothing to lose. really at that time I think that was a I don't think a year like that has occurred since I mean I think that year 1998 the Russell 2000 was down high single digits maybe nine percent and the S&P was up double digits the disparity between the big and small was this which was just obscene you know

I think you're you're potentially seeing the rubber band get stretched pretty far again on those kinds of disparities but I will say this time we're a little bit different you know the bigger companies are earning a lot of money and still growing and you know our dominant forces unlike then I think a lot of the disparity came from just higher and higher valuations on a number of big companies you know you go back to like Walmart Merck GE you know they had have seen obscene valuations that, you know, took many, many years to kind of for the earnings to grow into those valuations.

Yeah. So I don't see, I've seen a variety of tough markets. I guess I felt personally that 2008, 2009 was a bit tougher than what's going on this year. I guess to me, what's fascinating this year, just fascinating is what trends. are sustainable, what, you know, which trends are that you should you extrapolate, which ones should you not, you know, were some markets, did we hit the tipping point in some markets and it was just we pulled forward enough volume that, you know, there's no looking back. I think that that, you know, figuring some of this stuff out because it involves so much human nature is, it's just a, that is a wicked curve wall that, um, that, um, that I think potentially offers, you know, tremendous amounts of alpha to be earned by fundamental managers,

maybe, say, versus the past decade where, you know, being in a low-cost, fully invested index strategy, you know, was just set an absolutely brutal pace since 1109. So, you know, we're having a particularly good year this year. And I think the ability of managers to add value right now is. is as high as it's been in some time. Yeah. No, it's like, you know, if you think back to March, I mean, home building stocks, not just stocks,

like home builders in general have been on fire because home sales are going off the charts. And like back in March, it wouldn't have been obvious to me like, hey, we're in a pandemic, millions of people are out of work. Everyone's going to want to go buy houses because everyone's fleeing cities, right? Like that wouldn't have been obvious. And then to your point, is that all demand pull forward, right? Like, are we going to go through a huge barren period of home?

sales after kind of this craze or is this a new trend or people fleeing cities and home prices are going to go up and home builders so it's really interesting think about that we mentioned it on our last podcast Carbana with used car sales is this pull forward it's tough and the people who figure it out obviously there's a lot of alpha to be earned if you can if you can think kind of through that yeah 100% look and I will say there's pockets of companies investment securities equities that are you know we're not going to rush out and short things, you know, like Tesla or other things for high valuations or Carvana. We did visit Carvada, by the way, and we're very intrigued and really close to

pulling a trigger. You know, unfortunately you missed that. You know, if you're in this business for a while, but the list of misses. Yeah. Yeah. It would be much, much bigger in the list of things that you got right. That was one that we miss. But it's fascinating. You know, what, what's going on in the world today, like the RVs, shortage, bicycles, it's just, it's, it's all, it's all I can do to try to keep up with some of these things and have them apply to your current portfolio and think as you contemplate you things to invest in, which, you know, to me, it's challenging and exciting. It keeps it interesting. And yeah, it's it's, it's about as wicked of a curveball as one might expect if they've been in this business for a while.

Yeah, predicting that at the time, who the beneficiaries were, I mean, we have an investment in PayPal and has ever since the spinoff, you know, and the initial reaction there was down negative people who have less money to spend. You know, now it's just been an absolute accelerate to their entire business model for demand. And I think when they did their call early on, it really warned me that, boy, this is going to be a difficult environment to sift through. It's super interesting. There's aspects of PayPal. I think that essentially the tipping point is reached. There's other aspects where there's probably some more reversion to the mean. So it's a fascinating, fascinating time. I believe

that. Yeah, no, fully agree. But let me rewind from today to kind of earlier in your career. You mentioned just now that you learned some stuff from Expedia that really struck you. And you put a tweet thread out a couple weeks ago. I'll be sure to link to it. But I was hoping you could maybe just dive into what happened to Xpedia and kind of what it taught you because the tweet thread, I mean, it was so interesting to me. And I think our listeners would love to hear that. Yeah. Well, I will say, Look, just in general, there's pockets of investment opportunities, you know, across our country. Many of them are concentrated.

Northern California happens to be one of the places where a lot of companies are. So, you know, I have always enjoyed traveling and getting in front of management teams. It's just my style. So I will say it's a new, it is a little bit of a new world here, by the way, not being able to visit companies, not being able to walk floors, not be able to meet with senior executives face-to-face, and everyone's adopting on that. But, you know, that's something that we did going way back to, you know, 1997, 1998. I should say we now.

We have six people at the firm when I first started. It was just myself. But I was all over Silicon Valley, you know, in 97, 98, 98. trying to understand what was going on with this shiny new thing, the internet, and how it might change the world. And it was just fascinating. But, you know, given my background and, you know, a variety of factors, you know, I was somewhat of a conservative value investor. And many of the things that were exciting people in training up just were very difficult to justify, you know, on evaluation basis. But I did meet with companies. I did meet with executives. I know,

had an open mind. You know, many of them raised a lot of cash and blew it, though many of them didn't. Many raised cash and spend it more wisely. And the Expedia visit was just an absolutely fascinating situation. You know, the company that was the catalyst for that trip was a company in Chicago called Galileo, which was this global distribution services companies. They still exist, like Amadeus, Sabre, WorldSpan, I think. You know, there's been a lot of consolidation in that business. But essentially, these were the old school ways that, they were airline owned initially, and this is how airlines got through the recessions way back when they taxed and told the

other airlines that didn't own a piece of their GDS. So they took a fee on anyone that participated in the GDS, you know, Wall Street being what it is and whatnot. These were undervalued assets. They were sold. They were public. They were sped off. So they kind of became publicly traded. And we got interested in this one called Galileo that traded a particularly low valuation. United Airlines was the parent back then. And I remember we were visiting the company. It was it was a day in March of 2000 where the internet fee were just broke. And we were visiting Galileo that day. I think it was a Friday. I can't remember the exact date. But essentially,

the growth story was ending on that day and you know gosh I don't know if we had a blackberry back then but we kind of became aware that the mark was melting down so we started talking and this CEO who did a very good job by the way for his shareholders he sold out did create a lot of value he didn't get Expedia right was very bearish on the prospects of expedia and then you know they were they I can't remember the name of it for the life of me that they had a business that they were going to start, you know, a copycat business. And if we're wrong, we're going to have our online travel business, and we're going to sell a lot of travel this way.

So, you know, we've got them boxed in. And so then I said, well, like that, sounds pretty interesting. You know, we like this Galileo. If we can find something short, you know, perhaps that'll be a good pair trade. We were able to get a meeting with Expedia. And, you know, kind of, I don't want to just repeat the Twitter thread that I did, but, you know, I walked in the room and, you know, there was like five or six people in there. Rich Barton's in there. I'm still friendly with him to this day. Great meeting. He's created a tremendous amount of value for Cheryl over time. You know, sat a little bit surprised that everyone was there, sat down, started talking, started asking questions, and I got to tell you, I was just, wow.

You know, at the time, this was a, it was a rare bird even back. back then it was as a publicly traded subsidiary of Microsoft so it was a carve-out, it wasn't a spit-out and then other than evaluate, sorry, ownership changed hands, Barry Diller took it over then subsequently split it out. And at that meeting, I just got, well, to be fair, some of the CEOs and other people I met in the Valley at the time when things were really hot. were super high and irrational, you know, they were, you know, every bit as interesting as the Expedia folks, you know, but at this point, you know, the, you know, the parachutes are being handed out. Like, who's going to be the survivor? Who's going to be, you know, who's going to make it? And so it was a, it was a different time that we showed up there. But yeah, they were super sophisticated, highly motivated, just absolute killer type. It was the first time where I think the stars aligned where I said, boy, this team is really turning me on.

They have some really good ideas. And it wasn't like I had to, you know, pay King's ransom to own shares in the company. So that it was, it was one of the best meetings that I ever had. And I kind of came out with the opposite as I kind of expected to come out. with and it challenged me at the time I was you know the whole it's kind of hard to describe people laugh at this now but I mean back in the day was like the cool thing was it was to be skeptical about business models I mean like everyone is trying to sell you something everyone is a lot of hype so you know this will sound kind of crazy to how much the world's changed

but you know being conservative and being skeptical about but an idea was was was in style so like you know you you passed on things that were that you know had too much hype or too much growth you know that it indicated a lack of discipline if you if you were not you know financially conservative and you know and skeptical of everything you heard it was it was just it's a bit different now there's plenty of people that do that and you still need to be skeptical about ideas. You know, I'm certainly not going to rush out and pay $1,800 a share for Tesla and expect a super high rate of return from that. Maybe I should. I always keep an open mind. But it was a very

different time. And we essentially had a, you know, a game-changing event, which was the Internet turning on and getting adopted en masse that it allowed for a, you know, tremendous level of, you know, tremendous flatness in communication. It was a, it was like a wrecking ball through a lot of business models. So anyway, I'll pause there for a second. I don't know. Good job. I mean, that was fantastic.

I guess the two things I kind of want to dive in there. So I guess the first, Rich Barden, he's just created value at basically every company he's touched over the past 20 years. years, I believe. Have you invested in any of his companies? Like, obviously, you went to that one, you loved him as a manager. Have you invested in anything else? Zillow recently, obviously, comes to mind, but anything else that he's done that you've touched? No, you know, most of his, most of his businesses have been private, you know, for most of the years. So he, you know, he had his fingers in a number of different things. And so there weren't a tremendous amount of

opportunities to invest in them. You know, that Zillow, obviously, is one now, but it wasn't like there was a Rich Barton play available, you know, over the past 15 years. You know, though Rich, I still think he's on the board of Netflix and, you know, the kind of thinking that was triggered in me at the Expedia meeting all those years ago, you know, led to, you know, a lot of other great meeting successful investments with similar kinds of businesses. So I don't know, one, one, you know, some of my, some of the things that I learned at Expedia and some of the challenges about how to think about, you know, new disruptive business

models, you know, clearly I brought to bear on the Netflix opportunity. So just one more thing before we, I do want to dive into Netflix, but one more thing there. So obviously go to this meeting. you love the team, they pitch it, not that they pitch it, but everything they're saying is striking with you and you think it's great meeting. You know, one thing I've had trouble with is you talk to CEO, you talk to his team, and you love what they're saying. Everything they're saying makes sense. It sounds logical. And I worry that, you know, CEOs generally get there unless they are founders or even if they are founders because they're great salesmen and they know how to tell a story. And like, you know, I can't help but thinking like charismatic founders, oftentimes one of

the reasons, something that goes along with charisma is fraud, right? Like, I think to Elizabeth Holmes at Theranos or not that we work was a complete fraud, but obviously we work had a lot of cult of personality around it. So how do you balance the two where are you going to meeting the CEO pitch or something really well? But, you know, it's very easy to be sold on something and kind of taken in. Yeah, well, you've got to do your homework. You know, if you're ready, I had we had experienced in that space and had thought about it a lot. And, you know, I showed up with a lot of really good questions.

I mean, I think if someone's bullshitting their way through, something, you know, you're eventually going to, you know, pick some of that up. And I say, you know, it's a, it's a valid question. So, I mean, part of that's just experience. I've done enough times. I've, I've gotten plenty of people right. You know, I've gotten a few people wrong. You know, we, you know, I have two analysts that support me and, you know, looking at, you know, running deep models at times. Some businesses are, you know, there are a lot more value could be added by modeling it you know in my new detail and another ones it's kind of a more qualitative analysis where you're thinking about what could this business look like in a couple of

years right you know how would the competition react so i mean we i would tend to show up these meetings with a you know a high degree of of knowledge and experience and in good detailed questions. It's one of the things I've always done in my career is just I will have some extremely specific things to talk to the team about. And if I could be matched, you know, pound for pound, punch for punch on some of those questions that tells me, you know, it's likely that they know what they're talking about or if they're making up as they go along, then they might make a mistake or say something

that doesn't make any sense. It's hard. I mean, I just, you know, these are very competitive people. They're hyper-rational. You know, I think of Rich as a, you know, I just, a consummate problem solver. He knows how to solve problems. You throw a problem at them, they'll figure it out. They'll work the problem.

They'll figure it out. They'll move on. It's, you know, he's very good at motivating teams. you know in very strategic thinking you know so when you present present a question about you know here's your competitive you know set if you do this this one's going to react that way that one's going to react that way that we think this one you know won't have a clue and they're not even considered you know those could lead to like super in depth conversations about very specific things and it's always something

thing that I've done with our investments when we can. And not all investments one could make, would that opportunity necessarily be available? I'd say one of the early in my career, one of my big mistakes was generally needing face-to-face meetings to get comfortable enough to make an investment. remember I had this like knockout fight about Amazon and something. Amazon is just, you know, they're just, they bring nothing to the table, commoditized. This would be, you know, post the correction and they sold a convertible bond and was trading down and it wasn't, you know, necessarily clear that, you know, not even necessarily, it wasn't at all clear that Amazon was

going to create tremendous value over time. But I remember I got into this huge argument. I said, You know, no, you're completely wrong. You know, even if Amazon goes bankrupt, I'll buy those bonds because, you know, that there's a, there's specific skill sets that they have, that they'll magnify over time that, you know, a traditional retail, it just simply won't be able to do. Well, the stupidity is that I was making this huge argument and just, like, didn't buy the stock because I couldn't get a meeting,

you know, in Seattle. Yeah. in there. So, I don't know, that is something that I, you know, that I evolved to also, which is I don't always have to meet the teams. I don't always have to grill them and get to know the CEO really well. That would be the preferred, you know, the preferred state of things. But it's a gaining factor if you're not a massive fund that has tremendous accents.

Yep. Perfect. So why don't we fast forward a little bit? So Exped is behind you. I think on Twitter, I would say the two things people most know you for would be either the activist investment at Elf, just because non-gafferned about it. I think a lot of people really were very interested in that. But then, obviously, you were one of the featured players in the book Netflix. Every time they needed an investor who was bullish on Netflix, they went to you and you were spot on.

And it's not just that you were saying it in hindsight. You were saying it in real time because they're quoting from your letters saying, hey, here's reasons X, Y, and Z why Blockbuster can't match Netflix up with this. I wonder if you could just talk about, you know, how did you find Netflix? How did you kind of see that Netflix could grow to be such a, why were you so bullish on Netflix early? Yeah, this was, this was, you know, in all in my years of investing, I mean, this one was probably the most fun, most interesting one. it's very difficult to own some of these things over extremely long periods of time. So we did, you know, did have a tremendous run with Netflix in our funds twice. It's one of those names, of course, had I never sold it, that would have been the best outcome.

But I could say there's also plenty of other names that I sold in the past that were tremendous sales. So we sold TripAdvisor four or five years ago for five times the current price. You know, even Grubhal recently, which we did really well with this year. You know, you could have sold that for 90 to 100 percent higher than the current price two years ago. Yep. This is a very, very humbling business to get back to your main question. You know, I don't talk to a lot of people. You know, I talk to my analyst, I talk to my team.

I always joke that I don't like talking to hedgeland managers. I like talking to operators, like Rich and other people that I know and developed a friendship with over time. But I do have some people that I enjoy speaking with. There was a guy in California who used to be on Twitter. He's no longer there. He's named John Menini, and I happen to be pretty friendly with him. And I just, the first, just to give fair credit, you know,

It's an obscure name to mention out of the blue. I think he was on Twitter for a while, and then went by-bye. But to give credit where credits do, he just, we talk every now and then, he's like, there's this new service. It's just such, so interesting. I mean, you know, I get it, and then I tell my neighbor, and they get it, and, you know, these DVDs come in the mail, which is so interesting. You know, take a look at the company.

First time I ever heard it and, you know, started looking on it and doing work on it. And, you know, I got very intrigued. I think, you know, I tweeted about this, I have to read about this a couple of times. You know, when you take a 30,000-foot view sometimes, a quick look, I'll say, just we'll call it, not 30,000-foot view, a quick and dirty look at a company, you might say, oh, you know, that's a commoditized business, you know, there's no barriers of entry. And, you know, I think Netflix early on had, you know, some aspects of that. Well, anyone can do this. It's just a warehouse. You know, you're renting DVDs. And in fact, you know, Walmart tried it for a time. And Blockbuster certainly did. And, you know, there are other entrants to it. But when you really examine something closely, and if you happen to be in the business of concentrating your portfolio, potentially in extreme ways, you have a lot of incentive to dig in there and really understand the details. We'll come close to assessing about companies from time to time. You know, as we did more, more work. We said, there's aspects of this business that are very, very difficult to get right, terribly difficult to get right. So it may appear easy from the outside, but there's a lot

of things going on on the inside. There's a secret sauce that makes it far more complicated than people think. So we kind of got that sense. And, you know, I think when we were calling on Netflix, their shares initially had popped and had come back down. now and I don't think it was a particularly great time for the company. So we showed, you know, enthusiastically asking questions, very interested in the business. You know, and I think, you know, the management team sensed that. So we've got access to the team and to a lot of executives there, which was really nice of them. And, you know, to this day, you know, I stayed in touch would read for years, but obviously

He's running such a big company now. I'm sure he would remember me. But I did lose touch with him. But he was so good. It's crazy. I joke from time to time. The fact that he could relate to humans and understand emotions would be, it was unusual given how intelligent he was.

He was so good. It's like, you know, saw the ball so clearly when he was up at bat. there was one thing that I got somewhat a little bit uncomfortable with but it kind of makes sense given how smart he is and how much of a visionary you know he is which is he he was a big gambler I mean he and not gambling in a sense that he went to Las Vegas but he he was willing to bet the whole company on you know on a belief yep way to go we're going there we're going to do this so if I don't get that right feedback I remember once he told me he said something something to me. It's like, well, if I don't get this right, you know, yeah, the company will be

bankrupt and we'll just reorganize it again, we'll raise some equity and start all over. Said it's so matter of fact, you know, and here you're buying the shares. And so in that scenario, you now have a zero on your hands of donut. That's a 100% loss. He said it so matter of fact that I couldn't believe it. You know, not even, didn't even think about the share if he owned or didn't worry about them. You know, I know he lived over at the time, and he still does over at Santa Cruz. So over the hill, you know, he wasn't, he wasn't, he wasn't kind of in Silicon Valley, but he was tremendous. I mean, I think we met with him five or six different times.

I always loved those meetings. My analysts have always said, like, Mario, you're going to California, see Reed? Like, you got to bring me. You got to bring me. It was, it was, he's still, in my opinion, you know, one of the best. You know, I haven't gotten to meet everyone, but he is, you know, probably the most talented, raw talent, raw, you know, pure horsepower. pound for pound most talented CEO I've met in my career and I've certainly met a lot not to take away from many of the other ones but he he was extraordinary I mean look how many people

within the same company can disrupt an entire industry right not that it was a huge but you know blockbuster was a big business they disrupted that business and then when they become kind of the largest video rental they disrupt themselves with an online streaming service when it completely was not clear. I mean, stars basically handed them the right to all the Disney films, right? Which right now you would say, hey, you have the rights to all the Disney film streaming. I mean, people would pay billions and billions for that. And I think they got it for like, what was it? It was a couple like tens of millions of dollars for multiple years. I mean, it's just incredibly how clearly you saw the ball and to do it twice is unreal. But you know what? I want to keep diving into

your background. But actually, I also want to kind of move to the present day and talk about a stock you currently own Uber. So unless, if you want to wrap up anything on Netflix or Expedia or anything in your past, I'm happy to, but I'd love to also move on to Uber if that works for you. Yeah, we could move on. I could, I could probably talk about, you know, some of those older stories, you know, forever. So, you know, it's more interesting to talk about new companies.

You know what? It just sounds to me like I'll have an excuse to bring you back on the podcast at some point. But, so let's fast forward to Uber. I know, I guess one thing we could kind of weave in is, I can see a throughline Expedia to Netflix to Uber, right? Like you're talking disruption, platforms, kind of controversial platforms through them, but just high-level Uber,

kind of what's your investment thesis to Uber and what attracts you to it? I think the shares are probably worth the IPO price right now. So that's a pretty substantial discount. And, you know, there's no super secret sauce there. Obviously the business has been impacted by the coronavirus and the pandemic and the reaction to all that, which is kind of crazy. They're on a very good path, I think, Q4 in the first two months in the first quarter, you know, but then the world changed. You know, I do have a baseline assumption, and I guess arguably given the market's close to all-time highs, again, the market has the baseline assumption that the world,

You know, we'll get back to normal, some sense of normalcy, especially over time. And, you know, I have that view as well. I remember when I first heard about Uber, when it was, I actually didn't even hear about Uber. I heard about the founder of Uber and how motivated he was to kind of change the world. And somewhat of a wild card, but I heard very positive things. And it reminded me of a company that we had a 10-year investment in that did really well with the called 1-800 contacts. Yep. That's now a private company on by, I think, PE firm has changed ownership a handful of times.

But, you know, they went out and changed the whole. landscape of how contact lenses are sold if they used to only be sold to optometrists and they kind of had a cartel and they came crashing those gates and you know there's all these state optometry boards

that would sue them and the American Autometrists Association would sue them in certain states give them a very hard time all they were trying to do was fight for the right to sell contact lens more cheaply on the

internet, through an 800 number, whatever way you want to do it, so consumers could benefit. The company had to fight for years and ultimately had to get a federal law pass to address some of the disparities and inequities that exist in for someone contact runs. And Uber reminded me a lot of that company in that process, and we went through that and that lasted multiple years. I don't want to have a, you know, this is not a political statement. And, you know, when I go out of my way as best they can to not be political, you know, on Twitter and investing is separate and distinct from political views.

But I do think people sometimes lose sight that Uber, you know, isn't 25% better than what existed before. It's 10 times better. It's almost the utility. It's such a good product, such a good idea. It's competing against, you know, what? but were formerly kind of monopolies that were not necessarily offering the best product to consumers. You know, the concept that you could, you know, hail a car to you and not have to go out and seek it and pay the same or even a lower price is just an absolute home run.

You know, I think there's tremendous, I don't think you see so much transactional value going over. a platform if one side is really taking advantage of the other. You know, I think there's a tremendous, tremendous need for this service. They've, I just think they've done an absolute phenomenal job over time. Did they break some rules? Were they a little bit too aggressive? You know, clearly, just like that company, 1-800 contacts did. They broke state optometry rules so they can.

can compete and offer consumers a better price. So I think Uber has that same dynamic to me that it's a great product for both sides of the equation for both the driver and the riders. There's a tremendous level of value that's added by connecting these disparate groups, and they deserve some fee or some take rate for putting these two together. I think all I've really done is looked at the ride share business, which they're now renamed the mobility business, and said, you know, here's what that company, you know, if you generate in 21, you know, in gross bookings, this much revenue. Let's look at it, you know, with more

of a steady state margin on it, and then let's allocate its share of overhead based on bookings You know, and I come out to a fairly chunky earnings number, and I don't know if that's, you know, run rate in 2020 sometime where that's 2021 full year number or it's, you know, some run rate in 21 or even 22 if things remain, you know, very challenging. But when I do that, I think I have a scaled up business with tremendous, tremendous barriers to entry. And, you know, again, low vary to entry, high variety of success. great business would scale, you know, with leading market share and many markets all over the world. And then that business is probably a really nice, valuable business. And then I put, you know, somewhat of a, you know, I wouldn't say conservative multiple on it, but, you know, something in the 13 to 15 range. And I get an evaluation for that business alone that exceeds the current price.

And this is just for the ride sharing slash mobility. piece of the business. Yeah. Yep. Okay, no, that's perfect. That's exactly what I was going to ask you. So you think ride chairing alone could be worth, you know, the stock's at 30. That's about a 50 billion valuation.

If I'm doing the numbers right in my head, I think they said they could get, I think their math works out to over $5 billion in mobility EBIT. So you think slap a 13 times multiple on that, that's $65 billion. That's more than the current share price and enterprise value. Is that kind of how you're thinking about it? That's, you know, the broad side of a bar, you know, the numbers. like that, different numbers, but not so far off from that. You know, I think, you know, I think we put a much more modest valuation on the delivery business than you have to keep in mind that

they have, you know, they are going to be burning some cash between now and when they're profitable. So, you know, our investments in marketable securities. And, you know, the other thing that really intrigued us is when they're, you know, you start to see trades. You know, let's take a business that we own 100% of and let's merge it with this other business like they've done, you know, a couple of times. There's probably some more trades to do there. You know, or essentially they, you know, eliminate losses on their P&L and take a valuable stake in something that's kind of, you know, hopefully in the process of consolidating. They've done this in certain markets and they've done this in certain businesses. So the portfolio aspect, too, is also interesting. You know,

essentially every time a loss is eliminated and the asset value is hopefully created, that's driving down the enterprise value and driving down the losses, which is really nice for the equity holder as long as those trends continue to happen. I think at the end of the day, you're going to be left with really two kind of core businesses, which is the mobility business and the delivery business. and, you know, I think there's some, you know, there's probably some hard decisions that need to be made on, you know, what kind of funding should occur for the loss-producing businesses, and they've continued to address that. You know, in a bizarre way, I think, you know, the coronavirus and even AB5 in the regulatory environment, you know, that puts a lot of pressure on the company. It's clearly a pressure on which year is now.

But that also puts pressure on the management team to, like, fight harder for profitability. When I first heard about this business, you know, and it probably was a decade ago, my first reaction, well, it sounds like an awesome business. How's that not going to be a great business? You're a middleman. You're going to be making, you know, a spread, and it's a big, addressable market, and it's competing, you know, very nicely against a service that, you know, I don't know. I mean, I don't think about taxis too often, you know, I'll take one every now and then. I used to joke around sometimes.

You know, when they flew to San Francisco, I started taking the cabs in from the airport because the Uber, you know, they would take six minutes to get there. And then there'd be a massive line of cabs there because it was taking them anymore. So actually, you could save a couple minutes by taking a cab. So I think they have a huge opportunity to pare down the portfolio, you know, whittle it down. to the profitable businesses, you know, let the ones that are lost producing either get rectified, merged out, or, you know, even kind of just somehow a hard exit on some of them. And you'd be left with a wonderful, nice, high-returning, profitable business, generating free cash flow, it'll still be growing.

And when it's obvious, it'll be too late. A lot of the opportunity, you know, it will revalue if we're right. on that. So one of the things, and we mentioned Grubhub a couple times, when I think back to my friends who were bulls on Grubhub, you know, years and years ago, one of the things they would always tell me is, hey, Andrew, go look at the European markets. They're already scaled. They're already profitable there, right? Just run the European markets economics, kind of on Grubhub's economics. And they would also point to some other things like, hey, New York City's profitable and subsidizing the rest of the nation. But they'd really say, look at the European margins. Think about

Grubhubhub's business with those margins. And you'll see this stock's going to be a whole run once they, if and when they hit those, which they were pretty sure it would. When I look at Uber, they say, hey, we're going to get mobility EBITDA margins to 45%. I think they were about 20% in 2019. Are there any international markets where there's 45% EBITDA margins? Because obviously, we're talking about more than doubling margins for, it's not that it's a mature business, but you know, it's already whittled down to two players and they're kind of scaled out nationally. So is there any example of that? Well, look, I think, look, in the fourth quarter, the margins were higher than you said. And then I think even in the first two months of the first quarter, the margins

were higher. So they were, you know, they were getting the way there. The conversion, you know, the delta in revenue, the delta in evita over the delta in revenue, I think, you know, the conversion factor was getting really high. So, you know, there seemed to be a pretty viable path getting there. Look, I do think some of their international markets are more profitable. I don't have those numbers at the tip of my fingers. I'm not sure that they shared all that data. They make comments from time to time, but that would make a lot of sense. So, you know, I think they're well in their way. It's interesting. You know, some of their early success and some of of the high valuations that they had and the ease of which they raise money.

Probably push them in businesses that wouldn't have been pursued naturally if that wasn't the case. So I think it's a hard transition for a company to go through. I mean, keep in mind, they've only been public for what, a year and two months or a year and a quarter or something like that. It takes a while for a company to find its legs. and to figure life out, you know, as a public company with a diversified shareholder base, you know, I think they're, you know, Dara has made a number of good moves that make a lot of

good long-term sense for the shareholders. So I think, you know, some of that aspirational reaches for this company, you know, some of them are probably still there and some of them will be need to address. But I just, I can't for the life of me, see how this isn't a really profitable business at one point. And yes, AB5 will have to be sorted out. But, you know, if there's anything I've learned about some of these kinds of situations, it'll be a game of cat and mouse. Yeah. I don't think, you know, if people, bulls and bears are waiting for one victory to end.

and all victories here, I just don't think that'll be the way it plays out. And if I had to guess, you know, who's war gaming the scenario is better? The regulators and the politicians, you know, or the Uber team. I'm going to have to go with the Uber team. I think there's some potentially extremely creative responses here that, you know, we'll be painful and maybe there's some nasty headline risks and all that kind of stuff. But, um, but, but the, There are responses that they could do, you know, to make it even more clear that they're a true third-party marketplace. They could do a hybrid third-party marketplace plus operators. You know, there's a story today about, you know, not only FedEx franchising kind of, you know, territories out to operators that would have employees.

So I think it's more likely that there's. a form of cat and mouse here that there will be responses on both sides for a while. And hopefully some form of agreement could be struck. Sometimes it does seem silly to me

to try to force so much economic activity which I, by the way, I fully believe validates the value on both sides. People might disagree with that. But to try to force it into you know, construct of, you know, employed or not employed.

You know, I've driven, I've been used to product enough and you had strike up conversations and, you know, so many people are between jobs, you know, between, you know, between this or that or a college student, you know, all these kinds of things. In St. Louis once, I had a hockey mom that, you know, drives to practice and, you know, her kid practices. She was from deep way out of town. and then she does rides to help pay for it and then comes and picks them up

and go back home. There's so many stories and she's not a full-time employee. That'll never work for her. There's plenty like that. So I do think the regulators and politicians want to think very carefully about the value of a flexible workforce.

I do think there's tremendous value in that. And if Uber is able to cater to that flexible workforce while investing in that, them and with additional layers of protections, I just think it's a, it's an equation that that makes sense for everyone. And again, with so much transactional value there, with so much transactional value exchanging hands, I just, to me it says, you know, it should be handled with kid gloves. It should be an attempt to preserve that much value on both sides. I think it's unquestionable. I just, I just, I don't think the riders are just there ripping on.

off drivers all day. It's clear value on both sides of the equation. It'll be sad to me if somehow that there can't be some resolution that pleases the regulators and politicians. Yeah, it's just weird to me to think like, hey, there are, you know, tens of thousands of drivers who are voluntarily signing up for this business and continually going back over and over against drive for them, right? And to think, hey, these guys, like, they're doing it of their own free will.

I'm sure they'd like other things, but it seems weird to say people are going on this platform of their own free will to work for it. And we need, we need to stop that for some reason. Yeah. And these jobs are, you know, look, they're very flexible jobs. You know, people say, oh, you can make more, you know, more working somewhere else with minimum wage. Well, and this is a different kind of, you know, this is a different kind of activity. You could roll out of bed and just get on the road and you could work for a short set period of time and then stop working. You talk on the phone. I mean, it's very different, very, very different. and showing up at a place with a uniform with punch in and punch out,

and you have to be dialed in and doing exactly what you're supposed to do over that entire time period, you know. So, yeah, anyway, that'll get sorted out. Look, and there's clearly some risks, you know, around the corner here. You know, I'm concerned about them. And there's certainly some headline risks on AB5 and Prop 22 of, you know, what happens there. But longer term, when I think about it, a lot of this will get sorted out in the marketplace.

Now, you know, the rides, if the rides all become more expensive, that obviously dense, some demand some. But even then, I do think, you know, that they preside over a marketplace that will find balance. They certainly have balance now, but at higher levels, at lower levels, and in all scenarios, have a nice, you know valuable business um you know my hope is is that there'll be some resolution there where the flexibility um of the drivers will not be squashed yep yep uh let's just turn back so bull case when when i was doing this uh one of the things i was talking some friends who long shot stocks short the stock and one of one of them said like look if in 2003 you could invest in a search engine, like it wouldn't have been clear who the winner was, right? You could have

done Google. It could have been Yahoo. It could have been any number of them. But by around 2008, 2009, you knew who the winner was. And if you could go back and invest in Google then, you would obviously do it, right? And what he was saying was, hey, in 2016, it wasn't 100% clear who the winner of ride share was going to be. But today, you know, Uber's got over 65% in all of their key markets at this point, right? So you know Roger is going to be huge. You know who the winner is. Investing in Uber today at a $50 billion valuation plus, actually kind of like $15 billion plus of cash and equity stakes and everything is kind of the equivalent of investing in Google in 2008. Do you, is that kind of part, does that make sense? Is that kind of how you think about it when

you invest here? It's, you know, if there's certain aspects we're not mentioning and people are scratching their heads, it's only because, you know, I've, I've already gotten past that. I think there's no question at all whatsoever that Uber is going to be dominant in most markets. I also look, you know, technology obsolescence, rightly or wrongly, I've included that risk. I have almost zero fear that self-driving cars, you know, manufactured or run by someone else is going to wreck Uber's market. ever or in the next 15 years next 10 to 15 years will be a pretty long time in the investment world

probably not for an extended period of time and then also you know just so many markets there's something looks good on the on the chalkboard whiteboard but then then there's the reality the reality is is that even if the technology exists, comes to pass rapidly, there'll be a hybrid period that will last years and years and years,

just like Netflix had DVDs by mail and some streaming, and that lasted a very long time. One kind of led to the other. The scale that Uber has, you know, you just got to give them a lot of nods for that. Anything that, any innovation that makes sense, they'll find it, they'll find it first, and they'll get the most benefit from it.

The amount of A-B testing, what they could do, the scale, it's just, it's breathtaking. And so I think the point that your friend had, you know, I almost take for granted. It's not even, it's a non-issue for me. It's a good point to make, though, because maybe other people don't think about it that way. I think it's it's kind of game over. Mike Nongap said something which I really love

is like, you know, does anyone think in 10 years from now you're not going to be able to press a button and have a car show up and pick you out at your house? Of course not. That's what you have. That's a certainty. The other thing that kind of strikes me about

investing in Uber today, I was just reading some of the transcripts from the past couple times Dura spoke and one of the things he said that struck me is over the past couple years, you know, you couldn't see our network effects because there was basically no cost of capital for our competitors. So they were going out and buying share and like we couldn't really show our network effect because of that, right? A zero cost of capital, everybody can play. But now that everybody's

kind of having some capital discipline, you're going to start to see our network effects really come into play. You know, how much do you think financials improve over the next 18 months now that you've kind of got two rational players in most of the markets, Uber's playing in? you know i mean i think we've already saw a preview you know uber shares you know are down significantly um you know from kind of pre-COVID they were they were on the path and you know at the margin we were you know we we we were um you know our hope and expectation was is that um that uber was going to acquire grubhub and that you'd have some you know potentially uh really extreme rationalization in the food delivery.

It's turned out that didn't quite happen that way, which is just a whole fascinating other topic about what's going on with Grubhub this year in food delivery domestically. So that part is delayed a bit. Sorry, just remind me of what your point you just said was. Just the network affects in the business. But actually, let's talk Grubhub.

So Uber lost out on Grubhub. I think they were kind of surprised that they missed out on Grubhubhub, but they quickly switched and went to Postmates. I guess how excited are you about the Postmates business, the food delivery business as that is taking the market from four players to three players in the food delivery business, right? Do you think like the synergies were just so much larger with Grubb?

This is really a second banana. Are you still excited about this deal? You know, I think there's less synergies with Postmates quite clearly. We thought the synergies would. with, um, we called it Groover. I think I was the first one to say that with Groover were, um, you know, potentially as much as, you know, 750, 800 million versus 200 million for postmates, I believe. Yeah, over time. So, um, we would have, we, we would have liked to see that. Um, but, you know, other people, some other people had, uh, had other plans.

So I will say, you know, hats off to Matt on developing a buyer that no one really expected to show up, let alone to pay a fair price for. So that was a huge win from Matt and the Grubup team. I don't think anyone expected that. We thought it would be a possibility, but we weren't counting on it. So he wasn't, you know, if he was only negotiating with Uber, that could have gone, you know, sideways pretty easily. But he wasn't. So that was just great. And so when you kind of, you know, go back to, and look, we, our original investment in Grubhubb, dates back to post-IP, and the shares got down to, I don't know, I think they, you know, they were at 30.

We nibbled at it. then they're in the high 20s, low 20s, and then bottomed out kind of at the high teams, and we were kind of buying the whole way. The first go around was Uber was going to eat their lunch, and we bought in pretty heavily then. We did sell some shares as the company appreciated all the way up to 150 or so approximately.

We started nibbling again, you know, close to the, to the current price. But the big event, you know, the scorched earth letter after Q3. I remember it well, yep. And the shares got absolutely obliterated. You know, at that point, we were, you know, we took a very scaled up position and had a very strong opinion that industry consolidation, you know, was at Grubhubb Store. You know, that turned out to be, to be right.

So just the turn of events from from Pub's Q3 letter to, you know, the capital markets appearing to dry up for DoorDash late last year, maybe early this year, then to COVID-19. Mm-hmm. And the pandemic and the acceleration of all the delivery folks' business models is just, it's just, it's just, just been absolutely fascinating and kind of funny you know uber is kind of the laggard everyone else has done great in food delivery door dash has certainly has a lot of momentum probably will be public postmates i think got an excellent evaluation given the situation and the scale and size that they had which wasn't great um mad and the grubb team did particularly well so the uber is kind of the the laggard right now, which, you know, laggards tend to interest me.

I told you I got interested in Netflix and Expedia when they were laggard, so, you know, here we are. Let me do one last one. So I think a frequent question, and something I've just kind of thought about is Uber's certainly talked about kind of giving us a fright. They've mentioned, I think they're dipping their toe, especially in Latin America with grocery delivery, all the type of stuff. What are the, do you subscribe any value to, hey, four years from now, these guys are competing with FedEx over last mile or you know these guys are going to be in fright in a big way

I think their recent investor deck was talking about how big the TAM for Friday is so clearly they're looking at it do you see any value there is that just free upside optionality or do you kind of dismiss that I have more confidence and stronger opinions on the mobility side and the delivery side I do think the delivery side is a bit unclear right now I've heard some People say, oh, you know, you know, Jesse's takeaway grub will have the urban centers, you know, who reads is going to be in the, you know, the outskirts of the city areas of DoorDash will be in the burbs, you know, and they obviously have more than just birth. They have certain cities of high sheriffs, and it just sounded too, too cute to me. Yeah. So I think it's a bit unclear what's going to happen.

And I had a much stronger opinion about the business and consolidation post, you know, scorchurchard letter from Grubhub than I do now. And, you know, I don't have to have strong opinions on all things at all times. I will say one dynamic that's really intriguing to me. You know, I've been at times a bit skeptical about the DoorDash model. I'm probably a bit less skeptical now about what they're doing. but I will say I am dying to see that companies financials and like to see them go public

and it's even more interesting is what kind of valuation will the public markets accord that business model so I guess one thing without directly answering your question of where this space is going and what's going to happen

I don't know I don't have a kind of super strong opinion on that right now I am intrigued by this whole AOV inflation deal that's occurring for all the operators during the pandemic, which is, you know, people ordering, you know, two meals at once, lunch or breakfast and lunch, families ordering together.

So the AOV inflation has been an absolute windfall to many of these operators and can be dropping $0.75 to a dollar a quarter of pure profit, you know, after interchange, you know, probably only, you know, to the bottom line. And that's been a significant lift for the companies. And I guess what's going back to some of the things we discussed earlier, you know, what can you extrapolate and what can't you? And I do think that AOV inflation is a very interesting question. I think the market accepts that AOB inflation as sort of a permanent factor.

So I'm very intrigued by. what kind of valuation DoorDash ultimately gets. I think the aspirations that DoorDash agrees have for local commerce and last mile delivery, they're quite fascinating and they're quite interesting. I think I'll say this. I think there is a place for JustE's takeaway Grubhub, being obsessive restaurant-focused operators where they wake up every day trying to think about how to help, generally speaking, an independent owner sell more.

Successful. I don't think that model is going to go away. I also think, and this is probably more of the Uber Eats and Door Dash side, that there is a model where food is just one component of the last mile logistics delivery network. Yep. Where they certainly want to do a good job on it, but they're looking to have a delivery network more than be a food restaurant expert. I think both those models got to exist.

I don't think one fully wins over the other. And I think ultimately the market that probably prevailed, as a combination of a marketplace and, you know, logistics network, married together, and that that's a winning model. But I don't, you know, look, we may see the same, we may see the same trade. You may see Just Seats takeaway selling U.S. assets down the road to, you know, DoorDash or Uber Eats, as they expand, you know, their addressable market. And, you know, it's not perceived as only a restaurant company.

So it just may be the same trade that potentially, you know, this happened recently, but down the road. But we didn't mention Lyft in any of this. And one thing that strikes me is, obviously, Uber has Uber Eats, and Lyft doesn't have Lyft eats, right? Do you think Lyft factors into this at all? Do you think, like, I think there was some conversation around a Lyft DoorDash at some point, if I remember correctly.

But do you think they have to get involved in that at any point? Yeah, I think Mike was the first person I heard mentioned that. And I don't know if anyone else was crazy enough to, to mention that. That was one of those crazy ideas that's not so crazy when you kind of think about it deeply.

So I don't have a super strong opinion about Lyft. I do like the portfolio approach that Uber has attached to its equity versus Lyft being kind of a more pure play focused domestic operator. I did

at the height of the grubhub, Uber, rumor mill, and press review, all the leaks that were happening back and forth, and I guess it's still the case today. When I think of a scaled mobility business sitting beneath a scaled delivery business domestically in the U.S., I just thought that that could be a really potent combination. Because if there's any, if there's three quarters of a billion or something in synergies or a billion in synergies on the expense side and revenue generating side you know the fact that they'd be addressing both markets at scale leveraging off the fixed cost of each other while other people are only addressing one portion of

that struck me as like that could be a really really potent combination longer term so we didn't quite get it just yet i think the market was you know had had expectations that you know that that could be a really nice thing on top of each other and get, you know, just eats, sorry, excuse me, get Uber Eats, delivery business, you know, close to break even globally, that that would have been a, you know, a really nice thing. But, but we'll see, it's a different price. Now that price was closer to 40. Now we're, you know, we're wrapped around 30. It's adjusted to that. You know, we'll see how it goes no look i came into this uh pretty bearish you know i i looked at the consolidated financials and you just say oh my god like you know even the mobility business doesn't

even cover even cover corporate overhead and that's kind of ignoring stocks but the more i looked at it the more i really liked dara and the more i was kind of with you i was like why isn't this google in 2008 you know facebook in 2012 2013 so anything else on uber that we should be covering or that you you want to say, or do you think we did a kind of nice job for the limitations of a podcast? Let me see here. No, I think that was a pretty good discussion. Great. Great.

Well, hey, this was a lot of fun. Last question before you go. Any other investors you think I should interview or have on the podcast? Just anyone you'd be interested in hearing from? Um, not at the top of my head, I know, I know, look, I like people that operate businesses and interesting to have some of those kinds of folks on as well. Yeah, I've been thinking about doing that. You know, the initial thought was it's easier as an investor to have smart investors on, research, whatever they're intelligent on. And then, like, I'm kind of getting more knowledgeable on it.

But I've been thinking about switching over and having some operating CEO. and people come on as well. But we'll work on that. Mario Chabilly, this has been so much fun. Thank you for coming on. I think there's tons of stuff on here. People are going to like, and we might have to have you on again at some point.

So thanks again. Yeah, my pleasure. Thanks for having me.